Transcript Amity School of Business

Amity School of Business
Economic Reforms:
Liberalisation, Privatisation and
Globalisation (LPG)
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The Economic crisis of June 1991
• In 1991, a crisis in the balance of payments, fiscal
imbalance, and domestic price rise led to the introduction of
economic reforms in the country.
• Foreign exchange reserves, which we generally maintain to
import petroleum and other important items, dropped to
levels that were not sufficient for even a fortnight.
• The country met with an economic crisis relating to its debt.
Particularly, the government was not able to make
repayments on its borrowings (dollar denominated) from
abroad;
• Fiscal deficit reached a level of 7.7 % of GDP in 1990-91.
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• The country had to pledge 67 tons of gold to external
agencies to raise a loan of USD 605 million to tide over
balance of payments crisis.
• Rising prices of essential goods- inflation rate 13-14 %.
• All this led the government to introduce a new set of policy
measures (economic reforms) which changed the direction
of our developmental strategies.
• Liberalisation, Privatisation, and Globalisation
(LPG) have been the three pillars of the economic reforms
process initiated by then government and furthered by
successive governments thereafter.
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Liberalisation
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Liberalisation
• It is the process of liberating economy from various
regulatory and control mechanisms of the state and of
giving greater freedom to private enterprise.
• Under the process of economic reforms, liberalisation has
taken place in almost all major sectors of the economy
including industry (manufacturing), services, infrastructure,
banking, capital markets, taxation, and external sector
(foreign trade and investments).
• It allows greater flexibility, reduces cost / product prices
and saves effort of business enterprises. It increases
efficiency, and competitiveness of business. It fosters
innovation and results into better products. Therefore above
all, it serves the consumer better.
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Multiple forms of liberalisation
• Delicensing (industrial license required only in six
industries)
• Dereservation of industries earlier reserved for public sector
/ small scale sector.
• Reduction in quantum of administrative controls /
clearances for economic activity.
• Freedom to public sector undertakings (PSUs) to access
capital markets.
• Corporatisation of departmental undertakings
• Permission to corporates for buy-back of shares
• Increase in investment ceiling of small-scale enterprises
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Multiple forms of liberalisation (contd.)
• Liberalisation of tax provisions
• Operational freedom to banks to enter insurance sector,
open new branches / introduce new products, set their
lending rates. Reduction in reserve ratios (CRR / SLR).
• Shifting of products and industries from administered price
mechanism.
• Freedom in distribution of select industrial products.
• Conversion of the excise system from specific to ad valorem
rates and adoption of value-added tax (VAT).
• Simplification of tax structure/procedures, reduction of
taxes.
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Multiple forms of liberalisation (contd.)
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Tax exemptions, holidays, and concessions.
Phased manufacturing programme discontinued.
Removal of mandatory convertibility clause.
Softening of MRTP regulations.
Foreign exchange reforms (devaluation & free exchange
rate).
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Privatisation
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Privatisation
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• Expresses faith in market system and its forces.
• Is not merely transfer of ownership of government owned
assets into private hands.
• It also refers to a process in which major economic
decisions concerning production, exchange, distribution and
consumption are entrusted to the market forces and
decisions are taken by a large number of individual and
private units.
• It thus gives freedom to own and operate business assets
and take market driven independent decisions.
• It generates competition. Market mechanism (an integral
part of privatisation) takes care of the allocative function in
the economy.
Forms of Privatisation Amity School of Business
• Divestiture, i.e. sale of govt. equity, in full or part, held in
public sector undertakings to private cos./individuals.
• Franchising of public sector services to designated private
companies.
• Licensing of technology of public sector units to private
enterprises.
• De-reservation of industries /economic activities earlier
reserved exclusively for public sector; i.e. private sector
allowed to enter into those reserved activities (roads,
shipping ports, airports, insurance, power transmission &
distribution, telecommunications etc.).
Forms of Privatisation Amity School of Business
• Privatisation of management in which govt. retains
ownership but management is entrusted to private hands
through lease or management contracts.
• Freedom to banks to determine their own lending rates in
view of market trends.
• Freeing of deposit rates of banks (subject to ceilings).
• Freeing of a number of products from administered price
mechanism.
• Contracting out number of services by public sector units
(like catering in Railways, electricity/water/telephone bill
payments etc.) to private enterprises.
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Most of the above measures discussed above counted
both for liberalisation as well as privatisation.
Nevertheless, together, these represent marketisation of
the economy in which free private enterprise has a
larger role to play.
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Globalisation
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Globalisation
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1. It is a process of global integration of products,
technology, labour, investment, information, and even
cultures. It tends to narrow down international differences
in prices, wage rates, and interest rates.
2. Share of ‘foreign trade’ in ‘national income (GDP)’ of an
economy (foreign trade orientation) is an important
indicator of the extent of its globalisation.
3. Globalisation of business takes place through international
trade, foreign investment, joint ventures, international
licensing, franchising, sub-contracting, international
horizontal and vertical integration of industries, strategic
alliances, international market sharing agreements,
advertising and information exchange.
Globalisation (contd.)
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4. Argument for globalisation is based on ‘gains from trade’
5. Globalisation expresses desirability for foreign capital and
considers it complementary to domestic investment.
6. It opens new business opportunities, encourages
competition, provides spin-off advantages, and enhances
knowledge.
7. Necessary safeguards, however, have to be provided to
reduce its adverse effects in form of dumping, external
dependence, erosion of economic sovereignty, and
deterioration of balance of payments.
Globalisation (contd.)
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8. Globalisation, as part economic reforms in India (post
1991), is a result of:
a) Internal economic compulsions;
b) External pressure from international community
particularly from institutions like IMF, the World Bank,
and the WTO;
c) As well as trend towards globalisation in a number of
developing countries.
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Measures towards Globalisation in India, post 1991:
1. Allowing foreign capital, technology, and workforce to
participate in Indian economy.
2. Offering incentives to MNCs and NRIs to invest in India;
3. Increase in the limit of foreign direct investment (FDI) in
number of sectors;
4. Creation of Foreign Investment Promotion Board as
separate body to study and clear FDI proposals on fast
track basis;
5. Sustained reduction in the customs duty rates on a number
of import items;
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Continued 6. Decanalising oil, agricultural products, ores trade;
7. Free import of a large number of items through open
general license;
8. Reduction / elimination of Quantitative Restrictions (QRs)
on a number of import items (715 goods w.e.f. 2001);
9. Simplification and standardization of a number of exportimport procedures and documentation;
10. Establishment of Special Economic Zones (SEZ);
11. Wide range of facilities and incentives to export-oriented
units (EOU);
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Continued 12. Replacement of Foreign Exchange Regulation Act
(FERA) with more liberal Foreign Exchange Management
Act (FEMA), 1999.
13. Permitting Indian companies to collaborate with foreign
companies in the form of foreign joint ventures (FJVs);
14. Full convertibility of rupee in current account;
15. Allowing the rupee to determine its own exchange rate in
the international market without official intervention;
16. Allowing foreign institutional investors (FIIs) to invest in
Indian capital market;
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Continued 17. Allowing Indian companies to procure funds from foreign
countries through ‘Euro Issues’ and ‘Global Deposit
Receipts’ (GDR);
18. Allowing Indian Mutual funds to invest in foreign
companies;
19. Permission to exporters to keep foreign exchange
accounts abroad to finance trade transactions;